A Lesson from the South for Fiscal Policy in the US and Other Advanced Countries

37 Pages Posted: 11 Jun 2011

See all articles by Jeffrey A. Frankel

Jeffrey A. Frankel

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Date Written: February 2, 2011

Abstract

American fiscal policy has been procyclical: Washington wasted the expansion period 2001-2007 by running budget deficits, but by 2011 had come to feel constrained by inherited debt to withdraw fiscal stimulus. Chile has achieved countercyclical fiscal policy – saving in booms and easing in recession – during the same decade that rich countries forgot how to do so. Chile has a rule that targets a structural budget balance. But rules are not credible by themselves. In Europe and the U.S., official forecasts are overly optimistic in booms; so revenue is spent rather than saved. Chile avoids such wishful thinking by having independent panels of experts decide what is structural and what is cyclical.

Keywords: budget rules, copper, Chile, commodity boom, countercyclical, fiscal, forecast, structural budget, institutions, procyclical, Stability and Growth Pact, United States

JEL Classification: E62, F41, H50, O54

Suggested Citation

Frankel, Jeffrey A., A Lesson from the South for Fiscal Policy in the US and Other Advanced Countries (February 2, 2011). HKS Working Paper No. RWP11-014, Available at SSRN: https://ssrn.com/abstract=1861358 or http://dx.doi.org/10.2139/ssrn.1861358

Jeffrey A. Frankel (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

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HOME PAGE: http://www.ksg.harvard.edu/fs/jfrankel

National Bureau of Economic Research (NBER)

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